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Moreover, the legislative history states, generally, that the
basis adjustment rules are analogous to those provided for
partnerships under section 705 and require that the basis of a
shareholder in an S corporation will be adjusted for income and
losses for any corporate tax year before the distribution rules
apply for that year.
In the instant case, the parties agree that MAI realized COD
income in the amount of $2,030,568 in the taxable year 1991.
Moreover, the parties concur that MAI was insolvent at the time
the debt was discharged and that the attendant income derived
therefrom is excludable from gross income pursuant to section
108(a)(1)(B) and (d)(7). The parties separate, however, on
whether the Internal Revenue Code permits petitioner to increase
the basis of his MAI stock by the amount of the S corporation's
COD income.
In essence, petitioner argues that the excluded COD income
is described in section 1366(a)(1)(A) because it could affect his
income tax liability if it were treated as a pass-through item of
income. In particular, petitioner contends that COD income
excluded under section 108(a) is "tax-exempt" income under
sections 1366(a) and 1367(a). Thus, petitioner argues that after
the amounts are passed through, he is entitled to a basis
increase with respect to his MAI stock for the excluded COD
income. In sum, petitioner argues that the issue turns on
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